Question

Boehm Corporation has had stable earnings growth of 5% a year for the past 10 years, and in 2019 Boehm paid dividends of $12 million on net income of $20 million. However, net income is expected to grow by 28% in 2020, and Boehm plans to invest $14.0 million in a plant expansion. This one-time unusual earnings growth won't be maintained, though, and after 2020 Boehm will return to its previous 5% earnings growth rate. Its target debt ratio is 33%. Boehm has 1 million shares of stock.

1. Calculate Boehm's dividend per share for 2020 under each of the following policies:
   1. Its 2020 dividend payment is set to force dividends per share to grow at the long-run growth rate in earnings. Round your answer to the nearest cent.

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   2. It continues the 2019 dividend payout ratio. Round your answer to the nearest cent.

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   3. It uses a pure residual policy with all distributions in the form of dividends (33% of the $14.0 million investment is financed with debt). Round your answer to the nearest cent.

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   4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy. What will the extra dividend be? Round your answer to the nearest cent.

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Answer 1

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